With European regulators slated to report the results of its initial stress tests on the region’s banks on the weekend, Toronto-based rating agency DRBS says it will be focusing on the firms that show capital shortfalls for possible rating action.
The European Central Bank (ECB) is due to report the results of its assessments of the EU’s largest banks on Oct. 26, including both a review of asset quality (AQR) by the ECB and the European Banking Authority’s stress test.
DBRS says that, in terms of possible ratings actions stemming from those results, its initial focus will be on banks that show a capital shortfall in the assessment — either for failing to achieve AQR-adjusted common equity tier 1 capital of 8%, tier 1 equity of 8% under a baseline scenario, or tier 1 equity of 5.5% in an adverse scenario, based upon financial data for year-end 2013.
“Our analysis will focus on the extent of the failure, whether the stress results provide new information on the bank’s fundamental position, and whether the bank has already taken steps to address any highlighted capital shortfall during 2014,” it says.
DBRS says that it will also take into consideration the current level of the bank’s rating, and the bank’s flexibility in raising additional capital, when assessing the impact of any capital shortfall on a bank’s ratings.
For banks that are facing a possible rating action due to a reported shortfall, DBRS says that rather than imposing an immediate downgrade, banks will likely be placed “under review with negative implications”, as these banks will have to until November to submit capital plans that address baseline shortfalls within six months, and adverse scenario shortfalls within nine months.
The rating agency says that it intends to make any rating actions, or commentary regarding the impact on affected banks’ ratings, as soon as possible after the ECB’s announcement, but by October 31 at the latest.
Overall, DBRS says it expects any rating impact to be limited to a small number of banks.